Money—A Bit of History

Our system of currency has some interesting beginnings. In 1691, Massachusetts issued its own paper money since the colonies were short of gold and silver. They had to use foreign coins to conduct trade and they bought more goods from outside the country than they sold to other countries.

Their coins were continually being drained leaving little money for trade within the colonies.

They called their paper money a “bill of credit” representing the government’s IOU or promise to pay tomorrow on a debt incurred today. The paper money was backed, not by silver or gold, but by the “full faith and credit of the government.” Soon other colonies followed the Massachusetts example and printed their own money.

Benjamin Franklin wrote a pamphlet that enthusiastically endorsed paper money as a way to stimulate the economy. There did not need to be gold to back this currency and the governments did not need to borrow money from banks. The paper currency was secured by future tax revenues. He said, “The riches of a country are to be valued by the quantity of labor its inhabitants are able to purchase and not by the quantity of gold and silver they possess.”

If gold was the medium of exchange and was plentiful, things were produced. If it was scarce, people were out of work. If you depended on the productivity of labor, you could allow more paper money to be printed to pay for that labor which allows more services and products to be produced and bought by the people being paid for their labor. And the government would not be forced to obtain money through the borrowing of it from a bank. The ability of the colonies to print their own money took away dependence on the British bankers and their gold. It then allowed the colonists to finance their local governments without taxing the people. In addition to the IOUs (bills of credit, treasury notes) issued by a colonial government, local loan offices (land banks) were set up which provided a stream of income from low rate interest charged to the borrower, usually a farmer. The loans were secured by land, silver or other hard assets. This new money came back to the loan office on a regular payment schedule preventing the money to inflate as it would with issuing IOUs which were backed by future taxes or deferred for long periods of time. This system allowed some colonies to prosper and increase their population.

What England really wanted from the colonies was their natural resources and the indebtedness to their banks. They weren’t that interested in the future prosperity of the colonists. In 1751 King George III banned the issuance of new paper money.

This history lesson in how money could be created and a populace could prosper hopefully will allow us to understand the present money system along with having a glimpse of other systems that may fuel an efficient economy.